We’ve all heard the old adage that “Cash is King”. Well, that may be true, but if you’re treating your business like and ATM and bleeding cash from sales, you are cheating yourself in the long run.
I’ve never met a small business owner who believes that there are not enough regulations, or that their tax burden is too low. To the contrary, our regulatory and tax policies are incredibly burdensome and tend to stifle small businesses, especially those that are just getting by. As a result, many/most business owners try to maximize their business deductions in order to minimize taxable income to Uncle Sam – a perfectly legitimate strategy.
Where this becomes problematic is when owners “bleed” cash from their gross sales and fail to register that income to the business. This is not only illegal, it’s detrimental to the business when it comes time to sell. Any buyer, banker, or reputable business broker will rely only on the actual revenues reported to the IRS on a tax return.
I can’t tell you how many times I’ve heard, “we’re showing only $500,000 in gross sales last year, but we really made $600,000”. My response is always the same . . . if it’s not on the books, it doesn’t exist.
The expense side is a somewhat different matter. Many business owners expense personal expenses to their business (that’s a conversation for you and your CPA), but most of those can be added back to cashflow if documented and justifiable. However, if you’re paying your employees “under the table” in cash, that transaction never hits the books, you’re not paying payroll taxes, and could be getting yourself in hot water with the IRS. When I price a business where this is happening, I have to decrease cashflow to account for what it should cost to pay your employees.
The bottom line is this: don’t treat your business like an ATM. If you’re not declaring all of your sales and expenses of your business, the valuation will come in far lower than you expect, and what the business is actually worth. Buyers will only pay for documented performance of a business, not what happens under the table. Document all of your sales, and keep your expenses above board. You’ll stay out of trouble with the IRS and you’re more likely to get the true value of your business when it’s time to sell.